Q3 2022 Intevac Inc Earnings Call
Two orders of $21 million as a result, 2022 is shaping up to be a record setting bookings here with new orders of over $110 million year to date.
Driving another sequential increase in backlog, which is also exceeded $110 million at quarter end.
The new order activity in Q3 was primarily focused around strategic technology upgrade initiatives, which we believe will position our HDD customers for their next generation of mass capacity drives for the cloud.
We also had a strong quarter of cash flow generation, primarily as a result of our advanced customer deposits received in support of our record level backlog and we ended Q3 with total cash and investments of $125 million.
As I'll discuss in more detail in the fourth quarter, we will be investing a portion of our cash in long lead time inventory in order to meet the planned delivery schedule, both for the trio forecast and for HDD upgrades.
And given these investments our forecast for total cash at year end is now in the $105 million to $110 million range.
As a reminder, the customer deposits deposits received in Q3, which resulted in a $125 million cash balance are typical of our customer engagements to fund necessary inventory purchases and you should expect that the sequential decline in cash during Q4, you'll also see a commensurate increase.
<unk> and inventory levels.
In my customer and investor facing activities since our last call I made another trip to Asia to meet with existing and potential new customers in both Singapore and Malaysia.
And to ensure a high volume manufacturing center in Singapore is positioned to rapidly ramp to a process module production in the coming months.
We also reviewed our technology roadmaps with our customers in both Asia and the USA to ensure we are fully aligned with their needs.
In addition met with many new and prospective investors, who are eager to understand our strategy and future prospects with a new trio platform.
The change in HDD demand environment.
Our plans related to a very healthy cash position.
We are very pleased to see all the new interest coming from the investment community and today I'll provide an update on our trio strategy.
About which I know you've been patiently awaiting all year.
We are pleased to report today that we have executed a nonbinding term sheet with Corning incorporated.
The objective of a partnership is the developments and deployments at the trail platform.
To apply coatings to glass and glass ceramic materials as Corning as a leading player in the use of these materials and consumer electronic applications.
We are advancing to a definitive agreement with Corning and expect to have it signed by year end.
Our confidence in the collaboration is such that we're starting to invest in long lead capital items to support program, which in turn will have a modest impact on our cash forecast for year end 2022.
Our objective has been to announce a partnership once they finish the definitive agreement was signed however, we are disclosing the status of our relationship with Corning today because of the substantial size of the opportunities being pursued across multiple applications and because the funding of some of the inventory purchases required to meet.
<unk> targeted deployment timelines is impacting our year end cash guidance, which we very been very consistently communicating through 2022.
Speaking about cash balance I will add is the strength of our balance sheet has been a highly valued into about acid theres been vitally important in establishing our ability to grow and scale. This is commensurate with a partner with leading global market share.
I look forward to updating you again once a definitive agreement is finalized, but clearly 2022 has been a very exciting and productive period of time for both me and the company as we are investing in the organization in order to be well positioned to execute on the growth ahead I was very pleased to announce the recent deployments of John .
Dickinson as our VP of operations and Mark Popovich, as our VP of business development, and Theyre already making an impact given the announcements of our partnership with Corning today.
Now I'll turn to the current demand environment in the hard disk industry.
Which has changed considerably since I joined <unk> earlier this year.
In talking with our customers and other industry experts. The most recent revisions to forecast. Some build plans are the result of a number of factors, which together have impacted both supply chain and demand levels for hard drives.
In the short term is multitude of factors, which include inconsistent component availability.
<unk> inventory bills higher costs overseas against the strengthening dollar a rapid contraction and drive demand for both the client and cloud customers and an overall slowdown in discretionary spending are resulting in an HDD production forecast for the fourth calendar quarter of 2022, this will be nearly half compared to the levels expected.
Just six months ago.
As a result, whereas prior industry expectations with immediate capacity utilization to be completely exhausted by year end instead, our customers are currently running media production at less than 60% of capacity.
This is expected to be a temporary cut to production levels with steadily increasing levels anticipated as we move through 2023.
Theres been no change in the long term importance of the hard drive industry in the cloud the need for capacity is insatiable.
Workloads continues growing complexity and the quote from our recent keynote hard drives are still the king of big data.
Given the continued robust demand profile domestic capacity hdds are the cloud over the next several years.
Customers are continuing to execute on our multiyear plans for capital investments both in capacity additions and technology upgrades.
Our longer term revenue forecast for HDD business is essentially unchanged since our last earnings call.
What has been adjusted for our customers. However is the balance of the demand between systems 40 call it new capacity and technology upgrades.
Steep reduction in production has afforded them a unique opportunity to take advantage of idle capacity and upgrade these systems in support of next generation media.
New tool installations have Ralph being de emphasized while upgrades are being pulled in.
Part of the $21 million of new orders received during Q3 were for accelerated deployment of upgrades in the core current coke as well as early 2023.
And towards the next generation of heat assisted magnetic media.
This prioritization of upgrades in Q4 as effectively replace the anticipated 200 lean tool shipments previously planned for Q4 revenue and our revenue forecast for 22 of approximately $34 $5 million is relatively consistent with our prior guidance.
We also continue to expect that our HDD revenues in 2023 will show modest growth over 2022 in the low double digit percentages as we said last quarter to approximately $40 million.
The recent order announcements for $12 million of hammer of rates supports our forecast for 2023 revenues.
The 200 lean system that has been scheduled for the current quarter has been rescheduled for July 2023, which drives the incremental revenue growth next year.
We expect revenues from HDD upgrades and field service will be similar next year compared to this year and the installations of new 200 lean capacity will now begin in earnest beginning in 2024 and 2025.
Our close collaboration with our customers on their future plans, along with solid backlog of $110 million and growing.
<unk> with continued confidence in our longer term hard drive revenue forecast at.
And supports our expectation for at least $200 million of HDD revenues through 2025.
Incremental to this unchanged forecast for growth in our HDD business is that we now see an extended investment cycle in both capacity and technology upgrades as the beginning beginning to give us visibility for at least $300 million of HDD revenues through 2026 with upside being driven by the installed base of <unk>.
About 150 systems that will need to be upgraded to seven process modules to be hammer.
April .
It's also worth emphasizing again this quarter that 100% of investments of our customers in both technology and capacity are currently being made on our 200 lean platform. We believe that the next technology transition will provide yet another opportunity to interact to gain an increased share of the world's hard drive media from store base.
In summary, 2022 has been a transformative year for interbank. We are very excited about the year ahead on a new partnership with Corning for our groundbreaking trailer platform.
Over the next quarter, we'll be finalizing our strategic plan and starting to develop a forecast for 2023 that reflects the expected HDD revenue profile along with the initial trio tool shipments.
We look forward to providing you with a clearer picture of 2023, when we meet again on the Q4 earnings call.
In the meantime, I will take this moment to emphasize just how committed we are as a company to increasing stockholder value and protecting the strength of the balance sheet.
That completes my prepared remarks, and with that I will now turn the call over to Jim.
Okay.
Thank you Nigel.
Turning to the third quarter results.
Revenues were $10 $8 million above our guidance of nine $5 million to $10 million due to upside in HDD upgrades.
Q3, gross margin was 45, 5% above our guidance of 39% to 40% due to more favorable mix of upgrades.
Q3, operating expenses were $8 $1 million above our guidance of $7 $5 million due to higher R&D expenses and higher stock based compensation expense.
The Q3 net loss from continuing operations was $3 2 million or.
Or <unk> 13 per share and better than our guidance of 15 to 17 cents per share.
Our backlog was $110 4 million at quarter end. This is the highest level since Q1 of 2010, and an increase of $10 million over the second quarter.
The recent $12 million order received to date in Q4 indicates that we expect backlog to grow again at year end.
We ended the quarter with cash and investments, including restricted cash of $124 9 million.
Equivalent to $4 91 per share based on $25 4 million shares at quarter end.
Cash flow generated by operations was $15 $3 million during the quarter.
We saw accounts receivable declined by $19 million in the quarter due to collections of customer down payments.
Added $6 million in inventory to support the growing backlog.
Q3 capital expenditures were $538000 and depreciation and amortization were $329000 for the quarter.
Now moving to Q4 guidance.
We are projecting revenues to be approximately $10 million, reflecting continued prioritization of hammer upgrades and a lower level of field service returns.
We expect fourth quarter gross margin to be around 32% to 34%.
Q4, operating expenses are expected to be around $8 million.
We expect interest income of about $400000 in GAAP tax expense of around $500000 in the quarter most of the tax expense will be noncash.
We are projecting a net loss in the range of 17 to 21 per share.
Based on 25 5 million shares outstanding.
Finally, as it relates to our cash forecast.
As Nigel discussed we are investing in long lead time inventory during Q4 to support both multiple <unk> system shipments as well as the acceleration of HDD process module upgrades in 2023.
Total inventory investments are in the range of $5 million to $10 million and we also expect that a portion of the pending customer deposits.
In Q3, ending receivables will be paid in January instead of December .
For these reasons, we are now expect in fiscal 'twenty, two with a total balance of cash equivalents and investments.
Between $105 million and $110 million <unk>.
Compared to the $115 million guided last quarter.
As we looked into 2023, while our strategic plan and forecast for next year is still in process keep in mind that we do expect the year to be second half weighted given the current delivery schedule for 200 lean system starting in July .
We currently expect our revenues over the next three quarters to consist solely of HDD upgrades spares and field service and that upgrades in Q1 will be down sequentially from Q4.
This completes the formal part of our presentation operator, we are ready for questions.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to have a question from the queue for participants using speaker equipment may be necessary to pick up your handset before pressing the <unk>.
Dr. Keith one moment, please poll for your questions.
Our first question comes from the line of Mark Miller with benchmark. Please proceed with your question.
Thank you for the question just wanted to make sure I understand the lean shipments now youre talking about maybe the first tools.
Calling out in July of next year, but really the bulk of leans will be 'twenty four 'twenty five is that correct.
Yes.
What's happened is the shift and change of prioritization.
To focus on the hammer upgrades and the new technology.
It has been prioritized by our customers and because of that they've moved the systems have moved out and they brought in the upgrades to drive. This next generation of technology and to use this time in the market to actually accelerate.
This upgrade program.
Your trio tool, you've attempted or interactions attempted previously to enter the market.
For glass coatings I'm just wondering.
What is different with this tool I assume this tool will be used also to deposit oxides. Besides metals.
Okay, so to answer that.
A couple of sanctions.
I think I've said on several calls.
Absolutely critical when you develop technology.
<unk> developed technology with a real partner and you look to solve real problems in the market.
And the tree of technology, we've developed to solve.
Our real challenge with scratching of anti reflective glass consumer devices.
And we've done as I think I've mentioned on the profitable goals.
The level of meeting this has increased the <unk>.
Engagements increase and that's probably the real Keith one of the key reasons, we've announced a nonbinding term sheet today.
Because for the last since the summer myself the board the entire team working on this.
Have been blacked out from trading or buying in shares.
Because as the relationship with Corning has progressed is now at a level, where it's not reasonably so.
To continue to keep this partnership of this magnitude confidential and therefore.
Do you think about the partnership with Corning.
About how we're now partnering with the leading glass supply and we've actually delivering a coated solution, which is very different lending. We've done in prior years is unique is taken the trio expertise.
It's taken a really a phenomenal expertise of.
He has 30 years of coaching if we think about I think more than anyone every bit of data people store information on is on a disk must be manufactured by interbank. We've got billions of durable glass substrates in the market and that expertise and processing and expertise in coating is please.
This unique partnership and that's why we announced it today.
Fleet change for the company is very new as solving a real customer problems real consumer program and is partnering with a leading glass company. It's a phenomenal change for this interval.
So the trio.
We focus on trauma logical coatings rent scratch and what about anti reflective coatings.
And an option for the trio yes.
Correct.
Good very good question. The trio is absolutely targeting anti reflective coatings and thats.
One of the things we found and I think we mentioned on the last call one of the benefits of some of the anti reflective coatings, we put into the technology has enabled a improvement in power usage of a handheld some unique capabilities.
Additional benefits from actually solving the requirements to provide a solution to give a scratch physician anti reflective coating. So that's the work that the technology team have done here to produce what is a world leading <unk>.
Process tool is phenomenal so we're very proud of what they've done.
Thank you.
Thank you Mark.
Thank you there are no further questions at this time I would like to turn the call back over to Nigel <unk> for closing remarks.
Thank you.
As I said, just said as I look at where we are today compared to 10 months ago when I joined.
I feel we've made tremendous progress in creating a new <unk>.
And I wish to thank all of our employees as well as their counterparts with our industry partners for their hard work and dedication as you'll be moving forward to this defining moments in <unk> history, a milestone engagement with the new <unk> platform as well as the HDD industry historic transition to hammer.
So we believe <unk> is not just a sound investment, but an exciting growth and turnaround story and we are eager to continue meeting with as many interested investors as possible.
And.
<unk>, our next Investor event in New York at the CEO Summit on December 30, followed by the Needham growth Conference in January so.
Please reach out to clear directly if you would like to follow up.
With that that either for everyone for the contributions and that.
Conclude todays call. So thank you.
Thank you. This concludes today's teleconference. You may now disconnect.
Yes.
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